Inflation - Part 3 of 3

Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well-known measure of Inflation is the CPI which measures consumer prices.

The Consumer Price Index is a measure prices of a list of goods and services purchased by a 'consumer'. The inflation rate is the percentage rate of change of a price index over time (typically 1 year). The list of items which are part of CPI are
• Food (this group has 8 sub items)
• Non Food like Pan, Supari, Tobacco and Intoxicants
• Fuel & Light
• Housing
• Clothing
• Miscellaneous

Due to excessive money in the system (‘Quantitative Easing’ in US, the printing of free money in US and EU) costs of basic items of consumption have increased. Also, due to the economic growth of India, levels of affordability of Indian consumers has also increased (look at the crowd at Indian malls!!!). Today more and more Indians are willing to spend higher as compared to few years ago on consumption items which are both a necessity and luxury.

The ‘young, working population’ of our country (now seen as the biggest asset of India) spends more than it saves. ‘Saving’ for a rainy day was more a habit of my parents’ generation.

Today the motto is ‘Have Money, Will Spend’. So RBI can continue to increase interest rates but if people refuse to save more than they spend, inflation is not going to come down.

PS: Inflation will ease post January 2012 because of the base effect. That’s what all policy makers in India are hoping for (fingers crossed).

Inflation - Part 2 of 3

Inflation reduces the purchasing power.

To control, inflation the RBI (Central Banks) increases interest rates. But how does increasing interest rates help reduce inflation.

Here’s how it works:
One pays interest on loans taken and receives interest on deposits made. To allow lending and borrowing, banks also borrow from / deposit with RBI.

By increasing interest rate, RBI achieves the following:
• Banks need money to lend so they borrow from RBI; if borrowing rate increases, they have to increase lending rates
• Loans become expensive and lesser people take loans
• Deposit rates become attractive so people save more and spend less
• Lesser ‘free money’ in the system
• Cost of items reduces as demand for the item falls (assuming supply is constant)

High inflation in India is not an exception though due to some India specific issues (supply side issues in agriculture) inflation is higher than other emerging countries.

Main reason for the inflation has been high globally is due to the loose monetary measures (keeping interest rates low and QE 1 & QE 2) by countries like US and the EU.

Next part: How’s inflation measured and why is not reducing even after interest rates have been increased by RBI many a times in the last 2 years.

Inflation - Part 1 of 3

With so much of talk about inflation and RBI’s monetary policy, so here’s the low down and again in a multi-part series.

We all know that inflation makes things more expensive, reduces purchasing power, gives enough headaches to governments all around (including being the cause for governments to fall), etc.

Inflation in simplest terms is got to do with ‘supply of money’. It is more money chasing limited items; it’s about people spending more than they are saving.

Here’s an example:
There are 3 friends (Alpha, Beta, Gamma), of different socio-economic backgrounds.
All of them make purchases needed for living (all these items are finite and limited in quantity and are impacted by economies of demand-supply) – fruits, vegetables, fuel, etc.

Let’s take petrol as the item they would like to buy. All 3 friends, by virtue their socio-economic backgrounds will be willing to pay different amounts for the same item.
Alpha has Rs. 3,000/-, Beta has Rs. 5,000/- and Gamma has Rs. 10,000/- of ‘money power’ they are willing to spend. Since the supply of petrol is limited, Gamma has the maximum power of ‘affordability’. The other 2 guys will possibly chose to use public transport :-).

The sheer power of ‘affordability’ makes items expensive for many people.

And why will petrol be an ‘unreasonable’ price in the first place? Remember, a producer of an item (in this case Organization of Petroleum Exporting Countries aka OPEC) will always want to sell at the maximum possible value as long as there are consumers to pay for it.

Risks and the Stock Markets - Part 7 of 7

As I come to the end of this series, my last food for thought – If one can survive with the risk of driving a car, one can very well survive the stock markets.

• Investing in the stock market / stock is very much like buying a car
o Identify your budget
o Do your research before you buy the stock
o Compare it with its peers
o Read reviews of the stock
o Look at historic performance of the stock
o Set your return targets of the stock and time period

• Investing in the stock market / stock is very much like driving your car
o Know your limits of the return on investment from your stock
o Don’t be ‘hands-off’ your portfolio
o One will not get good portfolio managers (just like you’ll not get good drivers)
o Be wary of what others are doing in the market not necessarily follow the herd
o Be cautious of the big vehicles (FIIs) who are also invested in your stock
o Maintain the course and speed; overspeeding (taking too many risks) is sign of desperation
o Bigger the car, higher is the confidence while driving (not applicable to auto drivers)

• Investing in the stock market / stock is very much like maintaining your car
o Review your stock’s performance regularly
o Check your portfolio with a financial advisor (not necessarily me :-)!)
o Sell your stock (just the way you would sell your car) when it reaches its end of fair value

Global Events, Global Markets, Global Euphoria!!

Last time I wrote the below article (barely a month ago!!), it looked like the financial markets were preparing for the worst melt-down in the Financial Markets.

As on Friday, stock markets have given fantastic returns over the 3 week period since September 22, 2011.

Brazil and Indian stock markets have returned 7.2% and 5.2% respectively in the last one week alone.

As in my previous article, even today no one has the ‘probable solution’. So why the elation in asset classes?
Case in point is though EU has cleared a Euro 400 Billion Fund, the total debt in the EU is 6,500 Billion. The EFSF is 6.15% of the total debt of the EU.

The important point to note is that stock markets have very short term memory. No news lasts forever. So don’t try to time to ‘bottom fish’ for good stocks.

Risks and the Stock Markets - Part 6 of 7

Here are the strategies for the various options you identify yourself with:
• Max profit of Rs. 10/- and max loss of Rs. 10/-
o Invest in an index linked mutual fund or an index ETF which gives you 10% returns and inflation reduces your value by 10%
o Net effect money’s value has neither increased nor reduced
o Disadvantage – you’ll never be able to keep pace with the loss in value of money

• Max profit of Rs. 20/- and max loss of Rs. 10/-
o Equity mutual funds (over 3 – 5 year periods) will give a return of 20% pa and inflation will reduce your money value by 10% pa
o This is a FAR BETTER option than PPF, FDs and endowment or money back insurance policies

• Max profit of Rs. 50/- and max loss of Rs. 50/-
o Large market cap stocks which are less impacted by macro and micro economic factors (E.g. FMCG stocks like ITC, HUL – we’ll not stop using toothpaste even if the dollar crashes, petrol becomes unaffordable )
o One needs to have some investment in these companies

• Max profit of Rs. 100/- and max loss of Rs. 100/-
o Penny stock, small market cap stocks (they rise, crash and most of the times vanish!!)
o Don’t get into these stocks
o People with very HIGH risk appetite should try

• Max profit of Rs. 200/- and max loss of Rs. 100/-
o Multi baggers like Hero Honda, Infosys and AirTel [I bought AirTel in 2002 @ Rs. 16, today the price is Rs. 744/- (price adjusted for stock split)]
o Current market provides many a opportunities of companies which will be “Blue Chip’ firms of tomorrow.

The next important rule is to split your Rs. 100 / Rs. 1,00,000/- in a mix and match of the above options. This is called portfolio diversification.

All options linked to the market should be looked as investments for atleast a 3+ year horizon.

Risks and the Stock Markets - Part 5 of 7

Continuing from my previous part of  the current series.

Now, if one invested Rs. 1,00,000/- and there was an opportunity to generate a profit or loss scenario as below, which one would you chose:
o Option A - Max profit of Rs. 10,000/- and max loss of Rs. 10,000/-
o Option B - Max profit of Rs. 20,000/- and max loss of Rs. 10,000/-
o Option C - Max profit of Rs. 50,000/- and max loss of Rs. 50,000/-
o Option D - Max profit of Rs. 1,00,000/- and max loss of Rs. 1,00,000/-
o Option E - Max profit of Rs. 2,00,000/- and max loss of Rs. 1,00,000/-

How many of you would change your choices compared to the previous illustration?

The question to all who changed their choices – the percentage gain or percentage loss was the same in both the illustrations, then why have different choices?

The reason for the change in choice is called ‘behavioral accounting’. For most of us, Rs. 100/- is an amount we are fine to run a risk of 100% loss. If one can get over this problem of mental accounting and based on your risk profile, you CAN INVEST in options linked to the stock market.

Risks and the Stock Markets - Part 4 of 7

Over the last 3 parts, I have touched upon the following:
• Perception of ‘Risk’ as the measure of ‘gain’
• Money can never be completely safe – its ‘purchasing power’ diminishes
• Zero ‘Risk’ is Zero ‘Gain’
• Governments don’t have the mandate to keep your money ‘safe’ and keep it ‘growing’
• Saving is not investing

Let’s now identify the degree of risk aversion one is comfortable with:
If one had Rs. 100/- and there was an opportunity to generate a profit or loss scenario as below, which one would you chose:
o Option A - Max profit of Rs. 10/- and max loss of Rs. 10/-
o Option B - Max profit of Rs. 20/- and max loss of Rs. 10/-
o Option C - Max profit of Rs. 50/- and max loss of Rs. 50/-
o Option D - Max profit of Rs. 100/- and max loss of Rs. 100/-
o Option E - Max profit of Rs. 200/- and max loss of Rs. 100/-

In the above illustration, inflation is considered as money value destroyer. Hence, profit and loss scenario can occur at the same time.

Global Events, Global Markets, Global Turmoil

Events like The World Wars, Great Depression, Lehmann Crisis, get etched in our minds by the sheer uniqueness or the magnitude of their occurrence.

Also, by virtue of the huge advances made in technology over the years, information (rumours, lies and truths) get disseminated ever so quickly.

Fortunately or unfortunately, in this ever increasingly connected world, making decisions for our investments becomes much more harder.

Today, among many other events, the global markets crashed. Over the last few months, every government, central banks, financial markets, commodity markets are clueless about the real problem, a probable solution, effectiveness of the solution and time period within which the solution will take effect.

Some countries are fighting high inflation, others are focusing on improving growth of their economies, some others fixing their debt crisis and a few are recovering from natural calamities . Since, all countries are not facing similar issues (pretty much expected at any given time), ‘One Size Fits All’ solution does not work.

Surprisingly, despite the varied issues countries are facing today, at the time of writing, stock markets across the world have fallen anywhere between 2% and 6%. Currencies have fallen between 2% to 7% against the dollar. Crude oil has fallen 3% to 5%, gold has fallen by 4%, silver by 10% ALL IN A SINGLE DAY.

Few of the key reasons for the current chaos (and at all other times :-)) and the root for the ‘negative perception of risk’

• Fear

• ‘Following the Herd’

• Greed

• Knowledge is power, ignorance is bliss – little of both is a recipe for disaster

If we can control the above reasons and ‘react’ better with our behaviour, global events will become less unique and smaller in magnitude.

Risks and the Stock Markets - Part 3 of 7

In the last part, my closing view was that money under our pillows / beds / piggy banks were the safest places :-).

Arguments I have received in response to the above are:

• Money under pillows (and other options) is not ‘investing’ as money does not grow and it still has the risk of being robbed.

• Money in a bank (savings, FD, et. al) is ‘invested’ as money does grow and the risk of the bank going bust is minimal.

We all know that ‘risk-reward ratio’ implies a higher risk is an opportunity for higher gain (and also loss :-)).

And hence, the rationale for the views from people is driven by:

• One would rather keep the money in a bank than under a pillow as the ‘risk’ (the chance of loss to burglars, IT Department) for the latter is higher.

• Banks rarely go bust

• Keep your risks as low as possible as long as the principal is safe

Here’s a fact – there have been atleast 6 banks in the last decade which have been forced by RBI to be merged or acquired by larger Indian banks as the banks went bust or were on the verge of it (E.g. Global Trust Bank was force merged into Oriental Bank of Commerce).

Indians, by virtue of our social training, have a ‘saving’ mentality and are focused on preservation of capital even at the expense of being in a low return (low risk) investment. Unfortunately, rarely do we realize that other important macro-economic factors (inflation, government administered interest rates, etc.) are reducing the purchasing power of our savings.

The incentive for investing is not the safety of the capital (though people do not realize this fact). The BIGGEST DRIVER for people to ‘invest’ money under pillows, FDs, PPFs, NSCs, (all the safe investments) is because the fluctuations of expected return is the least in all these forms. In any or all these investment forms, we know the final return for the tenure the capital is invested. This is not true for any investment form linked to the stock market.

If an FD gives you a 10% pa return on your capital, and if a stock can give you 3% return in a quarter (approx. 12% pa) then given a choice, where will you invest your money?

Food for Thought: If we know what return we want / are expecting from an investment class / form for a given tenure, then why not use the same tenet in the stock market.

Risks and the Stock Markets - Part 2 of 7

I’ll like to keep emphasizing through these series that one needs to look at ‘risk’ as the measure of gain / opportunity.

We all by training are conditioned to risk in almost everything we do which also includes our views about investing.

To invest (especially money) by definition is always about a profitable return. If you notice, ‘investing’ has no risk!!

Essentially, the problem lies not with investing but with the latter part of the definition, ‘profitable return’. This brings the concept of the risk-reward ratio.

From childhood, we are trained to save. The simplest form of saving was not to spend the money but to keep it aside in a ‘piggy bank’. Our parents saved in a slightly organized manner – they saved in PPFs, FDs, Savings Accounts, NSCs, etc. Fortunately, all these gave very ‘profitable returns’ and since most or all these instruments were backed by the government, there were ‘safe’.

But in our childhood did we realize that the money in our ‘piggy banks’ grew only if we saved more? By saving we only postponed our impulse to spend.

If I told you that the ‘Deposit Insurance & Credit Guarantee Corporation’ (a wholly owned subsidiary of RBI set-up in 1962) guarantees ONLY Rs. 1 lac regardless of the number of accounts (or type of accounts) held by a person in same capacity and the same right.

Essentially, if you held a savings account and / or current account and / or fixed deposit with one / more branches of the same bank, AND if the bank went bust, the MAXIMUM amount RBI will compensate will be Rs. 1 lac or the sum total of your money in all accounts whichever is LESSER.

With the above new input, is money in the Bank really safe? Is the return risk-free? Shouldn’t we just keep money under our pillows / beds (like the big politicians do) or just keep it in a PIGGY BANK!!

References –

www.dicgc.org.in

www.dictionary.com

Risks and the Stock Markets - Part 1 of 7

My next multi-part series deals with ‘Risks and the Stock Markets – Part 1 of 5’ (not sure how many parts it will be :-)).

Every now and then I get a new prospect for my portfolio management services (through a reference) and the varied responses I get to my question ‘Why do you want to invest in stock market and it’s varied derived forms?’ are:

• I have burnt my money; want to recover some of it

• Get better returns than a fixed deposit / recurring deposit / savings deposit

• I have no other place to invest

• Other people have made money

• Am not sure what to buy

• No time to track what I have bought

One of the most important aspects of investing which people disregard is the concept of risk and the associated perception of risk.

Risk by definition is the ‘exposure to chance of injury or loss’. Humans attach various perspectives to risk and decide the quantum of risk one is willing to undertake. Unfortunately, the definition of risk also has a bias – it tends to be negative in thought.

When I was working with TCS and had to travel quite often by flight, my father used to be extremely nervous. Reason – if I could reduce the frequency of my flights, I reduce the risk of being hijacked / being in an air crash, etc. Many of you will cite the fact that air travel is the safest mode of transport but still for a parent the perecption of the risk is very different from my perception.

Similary, for every situation, the appetite for risk and the amount of loss which one is willing to suffer varies from our own social upbringing, our sense of security (job, personal, emotional, etc.) and mental accounting of the quantum of loss we are willing to take.

Food for thought – how difficult will it be for you to accept risk as a measure of gain / an opportunity; positive thinking :-)!!

Investment in Gold - Part 4 of 4

This is the last of the 4 part series about ‘Investment in Gold’

e-Gold

• One of the most interesting investment cum consumption method of investing in Gold and picks the best aspects of all the previous investment methods

• Buy gold in minimum units of 1 (no fractional ownership) at prevailing market price - [similar to Gold ETF]

• Demat account to hold e-Gold is different from the one use for Gold ETFs / stocks – [no hassles of holding gold in lockers]

• Gold is of 995 grade (the highest grade in gold) – [purity is guaranteed]

• Brokerage is lower or equal to the brokerage as in gold ETFs – [overall transaction costs are lower]

• Your gold is held in a warehouse managed by the National Spot Exchange (view it as the gold in a very large locker) but you hold it in demat form - [safety, from a perspective of storage, as good as Gold ETFs]

• You can either sell gold and book profits (like you sell stocks / Gold Mutual Funds / Gold ETFs) or take delivery of the gold in the form of coins or bars by paying applicable state VAT and handling charges - [ease of selling]

• Trading window is 10:00 am to 11:30 pm - [unlike Gold ETFs or Gold Mutual Funds]

• Flexibility of buying any amount of gold without the hassles of getting a locker

• Tax treatment on the profits made by buying and selling of ETFs in NOT AS tax treatment of profits on stocks / shares.

• Not all brokers who deal with equity are brokers in e-Gold

Gold Futures

• Started in India in 2004; comes under the category of commodity trading

• The most rewarding AND riskiest of all investment methods in gold

• Works like stock futures

• You trade (buy / sell) large amount (multiples of lot size) of gold in a single transaction

• Minimum lot size for a gold future contract is 1 kg

• Not all brokers who deal with equity are brokers in Gold futures

Risk Reward Ratio (in decreasing risk and return)

Gold Futures > e-Gold > Gold ETFs > Gold Mutual Funds

Please note, I do not consider gold under the consumption category for the risk-reward ratio.

Investment in Gold - Part 3 of 4

Gold Exchange Traded Funds (ETFs)

• Exchange Traded Funds are investments made by an asset management company to manage Gold as the underlying asset. They invest in physical gold.

• You buy Gold ETFs in units of 1 (no fractional units) through a broker as ETFs are traded like stocks and shares on stock exchanges.

• Price of 1 unit (approx. 1 gm) of gold ETF keeps changing similar to the price changes in a stock on a given trading day; except the price also moves in tandem to world gold prices. [Prices of a given stock changes based on the perception of the value (this in turn has its own set of variables) of the company, dynamics of demand and supply shares in the market].

• You need to pay a brokerage charge when you buy / sell the gold ETF.

• One needs a demat account (demat account for gold ETF is the same as that for shares)

• Tax treatment on the profits made by buying and selling of ETFs in NOT AS tax treatment of profits on stocks / shares.

• As the Gold ETF is management by an AMC, there's an additional expense of 1% pa.

• Physical gold is bought by the AMC and managed by authorized participants on behalf of the AMC.

• Gold ETFs were launched in India in 2007

• Well known Gold ETFs - BeES Gold ETF, UTI Gold ETF, Kotak Gold ETF

• Automatic SIP (Systematic Investment Plan) is not possible in Gold ETFs

Gold Mutual Funds

• The investment company (AMC) invests in either companies involved with the mining, refining, trading of gold or invests in Gold ETFs (Fund-of-Funds).

• AIG World Gold Fund and DSP BR World Gold Fund invests in companies which mine, refine gold ore

• Gold ‘Fund-of-Funds’ trend was started by Reliance in 2011 followed by Kotak Gold Savings Fund. Reliance Gold Savings mutual fund is a fund which invests money in Reliance Gold ETF. SBI's latest Gold mutual fund is again a Fund of Funds which invests in SBI’s Gold ETF.

• Any mutual fund which invests in another mutual fund gives a lower return and has higher costs.

• Reliance Gold ETF will give higher returns than Reliance Gold Mutual fund.

• No need for demat account to buy gold mutual funds

• For every amount you invest, you get units of the gold fund. Fractional units are possible when you invest through gold mutual funds

• Entry load / exit load and expense load (1.3%+ pa) as in any mutual fund is applicable

• Tax treatment on the profits made by buying and selling of ETFs in NOT AS tax treatment of profits on stocks / shares

• Automatic SIP (Systematic Investment Plan) is possible in Gold mutual funds

Investment in Gold - Part 2 of 4

Here’s Part 2 of 3 of the series 'Investment in Gold'.

Gold As Consumption

Bars & Coins:

• Typically in standard weights of 1 gm, 5 gm etc.

• Available from Banks, Jewelers, Gold Marts

• Purity is 24 carats or 22 carats

• Price is subjective to the prevalent rate of the day in the World Market indicated in dollars per troy ounce for 24 carat gold.

• Additional charges include die charges for marking and certification of purity

• 1 Troy Ounce is 31.1 gms

• Price of Gold in India for Gold is calculated by

o Value of USD in INR per Troy Ounce

o Convert the rate from previous point to get rate per gram for 24 carat gold

• Don't buy bars / coins from Banks as they charge a higher premium

• Don't buy 24 carat gold bars / coins. Jewelers prefer to buy back 22 carat gold

• Purity of gold only guaranteed by banks for coins / bars sold by them

• BIS standards exist; all purchases from a jeweler are based on trust / reputation of the jeweler

Jewelry:

• No standard weight for jewelry bought

• Costs include making charges, wastage charges and state VAT.

• Indians typically choose to buy 22 carat jewelry

• More complex the design, higher the wastage and making charges which increases your cost of acquisition

• Though BIS standards exist, all purchases from a jeweler are based on trust / reputation of the jeweler

Additional cost of keeping the above forms of gold in bank lockers. Gold sitting in lockers does not generate any intrinsic value (until price of gold increases).

In many a movies (and in real life), selling of the 'household' gold is the last resort to encash the value of gold.

In India, culturally, Gold is an asset handed over from a generation to another (mother to daughter, mother-in-law to daughter-in-law, etc). Gold is also part of tradition / custom of many castes / religions in India.

Gold is an asset which is traditionally a way of giving a girl's share in the family property.

Now NBFCs (Non Banking Financial Corporations) like Muthoot and Mannapuram offer loans against gold.

• Here the price of the gold is taken as the average of gold price over the last 90 days.

• Purity and total weight of gold are key factors to arrive at the amount of loan you can get.

• Loan sanctioned is 70% of the total value arrived based on the above 2 points

• Interest on this type of loan is between 14 – 16 % per annum

Investment in Gold - Part 1 of 4

Continuing from one of my previous mail threads about Gold, I’ll be sharing a 3 part series about investment in Gold. So here’s Part 1 of 3.

Gold prices are impacted by the following:

• Jewelry off take (pure consumption demand)

• Industrial use

• Geo-political concerns

• US dollar movement against other currencies

• Indian rupee movement against the US dollar

• Central Banks diversifying into bullion (Central Banks normally invest in bonds of other countries mostly US, Germany, France, Canada – AAA+ rating :-) )

• Central Bank Sales Slowing and Massive De-Hedging

• Gold Mine Production

• Fall in Supply

• Buying of gold can be broadly classified into 2 categories

o Consumption and

o Investment

• By world statistics, gold is mostly bought for consumption, investment and finally for industrial use

Gold for Consumption:

• Buying of gold is influenced with the intent to HOLD and NOT SELL

• Forms of buying gold is in jewelery, coins, bars

• Industrial Use

• Mostly bought my individuals and manufacturing companies in the hi-tech sector

Gold for Investment

• Buying of gold is influenced with the intent to SELL and NOT HOLD

• Forms of buying and selling of gold is Gold ETFs, Gold Mutual Funds

• Speculative buying in form or Gold Futures

• Mostly bought by investment management companies, central banks, speculators / traders and lastly by retail investors

FIIs - Boon or Bane

We have time and again heard business news channels blaming FIIs for every ‘massive’ selling which our Indian stock markets have to bear.

It’s analogous to ISI having a ‘hand’ in all terror activities taking place in India.

Though, I’ll not comment on the latter point, let me share my views on the former.

• From the beginning of this calendar year, we have had 166 trading days (including Aug 30, 2011) across the last 8 months.

• On Jan 3, 2011, Nifty opened at 6,177.45 and on Aug 30, 200 it closed at 5,001.00.

• Year to Date (YTD), the Nifty has lost 18.08% (if not for the 2 days of fantastic recovery, the loss was 22.23%)

• Out of the 166 trading days, the Nifty closed lower than the previous day on 93 days (56% of the trading days)

o On these 56% days, a trading day closed anywhere between -0.01% to -3.32% over the previous trading day

o Out of the 44% days, a trading day closed anywhere between +0.01% to +3.49% over the previous trading day

• Domestic Institutional Investors (DIIs - Banks, DFIs, Insurance and MFs and New Pension System) have been net buyers in 5 out of the last 8 months.

• FIIs (Foreign Institutional Investors) have been net buyers in 4 out of the last 8 months

• The biggest surprise

o DIIs have been net buyers to the tune of Rs. 22,594 crores

o FIIs have been net sellers to the tune of Rs. 16,446 crores

o Net-Net, there was more money put in the market than what was taken out in the last 8 months

If I consider the opening level of Nifty on the first trade day of a month vis-à-vis the closing level of Nifty on the last trade day of a month

• Only in 2 months (March & June) was the net level of Nifty in the positive

• Combined trades of FIIs & DIIs, months in which they were net buy were Mar, May, Jun, Jul

• Only in 1 month (March) were FIIs and DIIs on the same side in terms of market position (Net Buyers)

• All other months either FIIs have been net buyers / net sellers while DIIs have been net sellers / net buyers

We continue to be driven by what ‘West’, ‘Westerners’ do, either directly or indirectly.

This has been for the “good, bad, ugly” for our culture (past, present, future), economic policies, financial markets and anywhere else where we can see its influence.

• DIIs have shown confidence in our own markets, so should retail investors

• India is the 3rd fastest country (as per GDP growth rates for Q 1 – FY 2011-12) in the world today even at 7.7%

• Our country is more internal consumption driven than other developed markets

• India will be an economic super power sooner than later.

• When FIIs sell – BUY; when they buy – SELL

• FIIs will always pull out their money as and when they make profits

• Avoid stocks where FIIs holding is significant

IPOs of 2010 - A Reflection

Thought I would share my analysis of IPOs of 2010; a year which saw the stock market run upto 21K on the Sensex and then started to taper off. Today the Sensex is at almost 19K.

• There were 64 odd companies which tapped the primary market (IPOs).
• I have excluded 6 FPOs from my analysis (SCI, Power Grid, NTPC, REC, Engineers India, NMDC).
• IPO ratings have also been a new feature among most of the IPOs. Ratings were to help investors make better judgments before they invested in companies.
• The credit agencies (some of them are well-known) are CRISIL, CARE, ICRA, Fitch & Brickworks.
• Ratings are on a scale of 1 to 5 with 5 being the highest.
• Absolute returns is the absolute (non-annualized) profit or loss from the date of IPO listing till date.
• Annualized return is the return extrapolated to a per annum basis.

Here’s the low down:
Companies with IPO Rating of 1, 2 and No Rating
• Out of the 64 companies which had an IPO in 2010, 25 companies had a rating of 1 or 2 (including 2 which did not have a rating).
• From the previous point, it can be implied that 39% of last year’s IPOs were of companies with weak financial status / fundamentals
o Out of these 25, only 7 have a positive return till date (28% of the weak companies gave a positive return till date)
o 2 IPOs gave returns in the range of 0 to 10% profit
o Remaining 5 (out of the 7 IPOs with positive returns) gave above 10% (2 IPOs in fact have more than 30% profit)
o Negative absolute return range is from -22% to -80%

Companies with IPO Rating of 3
• Another 21 companies out of 64 had an IPO rating of 3 (33% of all IPOs last year had average financials)
o 6 IPOs have positive returns
  - 5 of the 6 have returns in excess of 75% absolute returns
  - The same 5 have an annualized returns of 77% (pa) as the lowest and 298% (pa) as the highest
- Out of these 5 super performers 3 companies have been listed for less than a year
o Remaining 15 IPOs had negative absolute returns ranging from -12% to -93%.
- Out of these 15 IPOs, 7 companies (with negative returns) have been listed for over an year on the stock markets.
o Negative absolute return range is from -12% to -93%

Companies with IPO Ratings of 4 and 5
• Finally, 18 IPOs had a rating or 4 or 5 (28% of all IPOs last year had strong financials)
o Only 2 had a rating of 5 – (Coal India and MOIL)
o Coal India’s absolute return is 54.57% (annualized 110.66%)
o MOIL’s absolute return is 0.97% (annualized 2.56%)
o 5 IPOs (including Coal India and MOIL) have a positive return
o 13 IPOs absolute return ranges from -3% to -55%

Summary
• Only 18 out of 64 IPOs gave positive returns; that’s a dismal 28% success rate of making any profit through IPOs
• 15 out of 64 IPOs gave a positive return more than the return on a fixed deposit (FD rate assumed as 8% pa)
• 8 out of 64 IPOs gave absolute returns of more than 50%; that’s a success rate of 1 in 10
• IPO ratings are only indicators so DO NOT invest in IPOs based on ratings
• Set your profit margins when you invest in IPOs; 10% absolute returns on listing is a safe bet
• Book your profits as soon as you hit your profit margins; preferably take out you capital and leave the profit in shares
• Always invest on the last day of the IPO
• Look at the subscription levels before you decide to invest in an IPO
• Set stop loss levels and exit stocks before you lose out most of your capital
• Don’t be in love with your investments in IPOs
o Don’t be too greedy for more profits
o Don’t wait for a share to come back to its cost price to exit; cut your losses
• Hindsight is always 20 / 20
o Murphy’s Law works; shares will always move up after you sell and always fall after you buy
• It’s better to pay 15% as tax on ‘short term capital gains’ than 20% (or 30%) as tax on interest from FDs. Hence, a 10% absolute return in an IPO is better than a 10% pa return on a FD.

Disclaimer: The views given above are my own and care has been taken to be as accurate as possible in representation of facts, figures and interpretations.

Stock Price Sources: BSE, NSE

Gold - Is it Worth to Buy Now?

Over the last few weeks gold has been creating new highs because everyone seems to think that gold is a safe investment class.

Dollar / Euro / Pound, etc are unsafe as their respective countries have economic problems.

But will there be a situation when you and I will buy petrol / vegetables in exchange for gold. Will we move back to a barter system? When countries have stopped using gold as standard for printing currency, how will investment in gold (by us or countries) help? When people and countries realize that, everyone will sell.

In India, people buy gold in jewellery form as it can be passed on to the next generation and hence not an investment class.

Surprisingly, (as per reports from the World Gold Council), in Q 2 of 2011, the demand in Gold ETFs (pure investment category) fell as compared to Q 2 of 2010. The increased demand for gold was by virtue of the increase in demand in gold jewellery. India and China accounted for 52% of global bar and coin investment and 55% of global jewellery demand.

So, if there’s a second recession, consumption for gold jewellery will fall and so will the prices. All it needs is India and China to grow slower than last year (these countries need not be in recession but slower growth will have its own impact).

Another fact, gold as an asset class gave positive returns in the decade 2001 – 2011; prior to which it was more or less stagnant. Prior to 2001, we have had economic crisis in other parts of the World and in India but gold never gave returns the way they have done in the last decade.

Buy stocks of strong companies. Keep investment in gold (as ETFs, jewellery, coins, bars, etc) to less than 5% of your portfolio.

Gold & Real Estate - Investment Options?

Many a times I have been asked whether gold is a good investment option. Similar questions are asked about real estate (empty land or built up area).

My response has been both yes and no.

Yes – as long as I am able to make a profit on an investment made in these items, they are an investment class. But so is any other commodity like Crude Oil, Silver, Steel, Rubber, Pepper.

No – as by and large, these commodities have no intrinsic value. These commodities are never sold at a cost price + proft margin. Their value is determined by the dynamics of demand (need to buy) to supply (need to sell).

In case of companies, there’s always a book value of the company, which is the fair value of the company per share. In commodities, there’s no fair value.

Investment in real estate, atleast in India, is fraught with risks many of us are oblivious about. As transaction value is large and so is the inherent risks, the reward (if all goes well) is also pretty high.

Also, if my neighbour’s property was sold at X, does not mean I will get X as a minimum. My property will valued when your ‘need to sell’ meets someone else’s ‘need to buy’. If I am in a crisis and my ‘need to sell’ is high, then Ill get a price lower than X.

Next Edition: Gold – Is it Worth to Buy Now?